The Employee Ownership Update

Loren Rodgers

June 23, 2014

Comments on ESOP Article in Wall Street Journal

In a June 23, 2014, article in the Wall Street Journal, Ruth Simon and Sarah Needleman note that the "federal government is stepping up scrutiny" of ESOP valuations, driven by concern especially at the Department of Labor (DOL). They cite Timothy Hauser of the Employee Benefits Security Administration (EBSA) at the DOL, who says that "valuation is the first, second, third, and fourth problem."

Hauser is certainly correct that the government has an interest in bringing enforcement action against companies that misuse ESOPs, but the article neglects to provide a picture of the typical company with an ESOP. According to data from the EBSA, ESOPs have both higher average return and lower volatility than 401(k) plans. Contributions to the ESOP come overwhelmingly not from employees but from companies, and those company contributions to ESOPs are on average 75% larger than to non-ESOP plans. Perhaps most persuasively, people who work for ESOP companies have between 2 and 2.5 times as much asset value in employer plans versus people in comparable non-ESOP companies. Data from the General Social Survey show that people in employee ownership plans are laid off at one-third to one-quarter the rate of those not on these plans.

More recent research, to be released next week by the NCEO, indicates that in the 2009 to 2013 period, roughly 1.2% of ESOP loans resulted in a default that imposed a loss on the lender, which is an annual rate of 0.2%.

Although two of the three cases cited in the article had unhappy endings, only a small portion of all ESOPs ever face legal challenges. ESOP companies tend to have lower rates of bankruptcy and higher levels of productivity, and it would be a shame if this article damaged the good names of these companies and their employee-owners.